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Say goodbye to the home loan blues with great advice to help navigate the various stages of your mortgage and pay it off fast.

By Marissa Saroca

No one willingly likes to go into debt, but when building a home it’s a scenario most of us will have to embrace. Luckily, gone are the days when a home loan automatically locked you into a life sentence — now, simple planning and hard work are all that are needed to get you early parole.

BEFORE THE LOAN

Budget/save – There are plenty of things to be done before signing on any dotted lines. Assuming that budgets and saving have already become high-priority words in your vocabulary, the amount of money you’ve saved will give you a good indication of the kind of loan you can handle, the amount you’d be approved for and, ultimately, the dream home you can start to plan.

The minimum deposit required will depend on the type of loan and the financial institution. According to RateCity, it’s recommended that you save approximately 20 per cent of the value of the property that you wish to purchase. A higher deposit means you’ll have more home loan options to choose from and will need to borrow less, which is obviously a good first step in paying off a loan as quickly as possible. However, property expert Chris Gray warns against holding off on getting a home loan in order to save more.

RateCity suggests that when working out how much you should borrow, your total repayments should be no more than 30 per cent of your total income with a buffer of around 2 per cent to protect yourself in case interest rates increase.

Research lenders/brokers/loans – The best defence is a good offence. Similarly, the best way to pay off your loan quicker is to have the right one to begin with. Kristy Sheppard, Senior Corporate Affairs Manager for Mortgage Choice, advocates shopping around for the best deal for you.

“There’s a wide variety of lending institutions out there that are eager to take your business,” she says. “It’s not all about the big banks — there are some terrific smaller banks, credit unions and building societies with great products that will be well suited to your needs. A small lender you’ve never heard of may even have the cheapest loan with the features you need and can provide you with superior customer service.

“Mortgage brokers are good places to go as they do most of the work for you and can often go straight to the right lender that suits,” says Chris Gray. “They cost nothing as the bank pays them a referral fee and they often get the same deal, if not better, than if you go direct.”

Whether you choose to deal directly with a lender or go through a broker, you’ll need to think about which loan will be best for you. This will depend on a few things such as whether or not you’ll live in the property or if it’s an investment. There are also many types of loans available, which will be a decision based on your own personal situation. Each loan also offers its own set of features, such as redraw facilities, the ability to make additional repayments or a split option — to have part of the interest fixed and the other part variable.

One of the most important things to do when shopping for a home loan is to read the fine print. You’ll need to be aware of upfront, ongoing and exit costs, which are often hidden fees and expenses when taking out a home loan, especially in relation to any features you’d like to make use of. A poor decision can obviously result in extra, unsuspected charges that could have otherwise been averted.

“People sometimes concentrate on the cheapest interest rate in the first year (honeymoon rates) rather than looking at the average cost over a few years,” says Chris Gray.

DURING THE LOAN

Increase payments – Damian Smith, CEO of RateCity.com.au, is adamant that the only absolutely guaranteed way of paying off your home loan quicker is to increase your repayments.

“Whether it’s an extra small regular amount a month or a lump sum each year from a work bonus, it can make a huge difference to the interest you save and the time it takes to pay off your loan,” he says.

Although it’s a sure-fire way to make a dent in your loan, it certainly isn’t the only way to get ahead. RAMS Home Loans suggest making more frequent, regular repayments as interest is generally accrued daily and then charged on a monthly basis. If you’re making weekly or fortnightly repayments as opposed to monthly, then you’re automatically minimising the accumulating interest and probably making more repayments through the year, too. Do, of course, check that these features are available on your home loan and you aren’t charged extra for making higher, more frequent payments.

Choose an offset account – Mortgage Choice recommends an offset account with redraw facilities as an option for putting regular savings to good use. Adding extra funds into an offset account reduces both the interest owed and the loan term. And you’ll have the flexibility of redrawing if you need the cash later on.

Switch home loans – Periodically reviewing your home loan is a great way to make sure it continues to work for you. You may find that your loan’s features are no longer applicable in your current situation and another loan with lower rates and fees may be more suitable.

RAMS Home Loans also suggests considering refinancing to a more competitive and cheaper interest rate. While most lenders do charge break fees and other costs, such as early repayment fees for switching loans, it pays to do your homework as lenders offering cheaper interest rates, reduced or no fees and charges may provide greater savings over the life of the loan and outweigh any initial break fees. Then — thanks to this sneaky tip from Mortgage Choice — if you switch to a cheaper home loan but keep your repayments at the same level, you’ll probably be able to repay your loan sooner and with less interest owed.

IF PROBLEMS ARISE…

Troubleshooting – Unforeseen circumstances can mean even the best-laid plans land belly up. Chris Gray says if you’re having trouble making repayments, the best thing to do is to seek help straightaway.

“An accountant can review your financial situation and go through options before debt gets too out of hand,” he says. “Also, speak to your lender as the company won’t want you to default and will try to help you whenever possible.”

If you haven’t been able to come to an arrangement with your credit provider, MoneySmart, the website from the Australian Securities and Investments Commission (ASIC), suggests applying for a hardship variation. This is a formal process where you ask the lender to “vary” the terms of your loan contract, which could result in repayments being postponed (although interest is still calculated), the extension of your loan period (meaning lower repayments) or an option to pay only interest on your loan for a period of time. More information and free financial survival guide factsheets are available at www.moneysmart.gov.au.

Refinancing your home is an option, and once again it’s best to shop around for the best loan for you. The Mortgage and Finance Association of Australia (MFAA) provides information and a list of approved members who specialise in refinancing and getting out of repayment troubles.

Industry Ombudsman – Lenders have an obligation to work with people in financial hardship and people who feel that their lender could have been more helpful can take a dispute to the Financial Ombudsman Service. This organisation will then mediate a meeting between the two parties and try to come to a resolution about how the debt might be repaid.

FINAL ADVICE FROM THE EXPERTS

“You need to trust the professionals,” says Chris Gray. “They work in this industry every day and there are literally hundreds of different options. Pay for professionals or pay from experience. Professionals often cost less.”

COMMON LOAN OPTIONS

Fixed rate: A set interest rate for a certain period of time no matter what happens to official interest rates. It then reverts to a variable rate. Safe, but you could miss out on falling interest rates.

Variable rate: The interest rate moves according to the lender and usually follows the Reserve Bank’s official interest rates. More risky, but huge benefits if rates behave.

Split rate: Combines elements of the fixed and variable rate options; for example, a per cent of the loan is fixed and the remainder variable. Sometimes attracts higher fees.

Basic home loan: A low but variable interest rate and few or no regular fees. However, offers limited flexibility.

Honeymoon/Introductory: Offers a very low interest rate for an introductory period — generally 12 months. Once the “honeymoon” is over, the interest rate reverts to the higher variable rate. Be sure to consider the costs long term, not just the sweet start.

Redraw facility: Lets you pay off more of your home loan but still allows access to those extra funds if you need them. There may be minimum redraw amounts and associated fees.

No deposit: When you borrow 100 per cent of the purchase price of the property. However, most institutions still require you to have saved 3 per cent of the purchase price, which then covers lender mortgage insurance.

Information from the Mortgage & Finance Association of Australia and RateCity.com.au